Report to the Ranking Minority

Member, Energy and Commerce

Committee, House of Representatives

United States General Accounting Office

GAO

November 2001 SECURITIES

REGULATION

Improvements Needed

in the Amex Listing

Program

GAO-02-18
Page i GAO-02-18 Amex Listing Program

Letter 1

Results in Brief 2

Background 5

Listing Requirements Have Generally Addressed the Same Factors,

but Amex Has Not Required That All Quantitative Requirements

Be Met 6

Amex Did Not Agree to OCIE’s Recommendations on Listing

Requirements and Public Disclosures 9

Amex Did Not Prepare Management Reports That Demonstrated

the Effectiveness of Its Listing Program 15

Conclusions 16

Recommendations to the Chairman, SEC 17

Agency Comments and Our Evaluation 17

Scope and Methodology 19

Appendix I Comments From the American Stock Exchange 21

Appendix II Comments From the Securities and Exchange

Commission 28

Tables

Table 1: Comparison of Quantitative Initial and Continued Listing

Requirements for Selected Factors in the Largest U.S.

Stock Markets (October 25, 2001) 7

Table 2: Duration of Time That Companies Did Not Comply With

Amex’s Continued Listing Guidelines (July 31, 2001) 11

Abbreviations

Amex American Stock Exchange

NASD National Association of Securities Dealers

NYSE New York Stock Exchange

OCIE Office of Compliance Inspections and Examinations

SEC Securities and Exchange Commission

SRO self-regulatory organization

Contents
Page 1 GAO-02-18 Amex Listing Program

November 27, 2001

The Honorable John D. Dingell

Ranking Minority Member

Committee on Energy and Commerce

House of Representatives

Dear Mr. Dingell:

A September 2000 press account questioned the quality of companies

newly listed for trading on the American Stock Exchange (Amex) and

warned that Amex risked losing its reputation by listing an increasing

number of very small companies. The Chairman of the Securities and

Exchange Commission (SEC) subsequently advised you that about onethird of Amex’s new listings in the first 8 months of 2000 did not meet the

exchange’s equity listing standards,1

 which Amex referred to as

guidelines.2

 The Commission stated separately that investors rightfully

presume that the companies listed on Amex meet its guidelines and that

the Commission would be concerned if Amex routinely approved listings

that did not meet them.3

 The development and implementation of listing

guidelines fall within Amex’s role as a self-regulatory organization (SRO).4

As part of its oversight of Amex in this role, the SEC Office of Compliance

Inspections and Examinations (OCIE) inspected the operations of the

Amex listing program and reported the results to Amex in April 2001.5

 1

 Equity listing standards are a market’s minimum quantitative and qualitative requirements

that companies must meet for their stock to be eligible for initial and continued listing for

trading.

2

 Amex referred to its listing requirements as guidelines because it had retained discretion

to list companies that did not meet all of its quantitative requirements.

3

 65 Fed. Reg. 58136 (Sept. 27, 2000) (SEC order approving amendments to the Amex listing

standards).

4

 SROs have an extensive role in regulating the U.S. securities markets, including ensuring

that members comply with federal securities laws and SRO rules. National securities

exchanges and registered securities associations, along with registered clearing agencies

and the Municipal Securities Rulemaking Board, are collectively termed SROs under

Section 3(a)(26) of the Securities Exchange Act of 1934. 15 U.S.C. § 78c(26) (1994).

5

 OCIE inspection reports are nonpublic and are issued to the SRO.

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-02-18 Amex Listing Program

This report responds to your increased concern about the adequacy of the

guidelines that Amex has used to list a company’s stock for trading and the

exchange’s adherence to them. On the basis of your September 2000

request letter, subsequent correspondence, and meetings with your staff,

this report (1) describes the key differences between the Amex equity

listing guidelines and the equity listing standards of other U.S. stock

markets; (2) reviews certain OCIE recommendations to Amex for

improving its equity listing program, focusing on areas of disagreement

between OCIE and Amex; and (3) examines how Amex monitors the

effectiveness of its equity listing department operations.

Amex’s quantitative and qualitative equity listing guidelines have

addressed factors that are the same as or similar to those addressed by the

equity listing standards of the other U.S. stock markets. Quantitative

requirements generally addressed such factors as share price,

stockholders’ equity, income, and market value of publicly held shares.6

However, the minimum thresholds for meeting these requirements varied

to reflect the differences in the characteristicssuch as sizeof the

companies that each market targeted for listing. For example, depending

on the listing alternative, the minimum market value of a company’s public

shares was expected to be either $3 million or $15 million under the Amex

initial listing guidelines, while this minimum value was either $60 million

or $100 million under the New York Stock Exchange (NYSE) standards. In

all the U.S. markets, the quantitative requirements for continued listing

were generally lower than those for initial listing. Also in all the markets,

the qualitative listing requirements generally addressed corporate

governance requirements, including such factors as conflicts of interest by

corporate insiders, the composition of audit committees, and shareholder

approval of corporate actions. The most significant difference between

Amex’s equity listing guidelines and the listing standards of the other U.S.

stock markets was that Amex was one of only two markets that retained

discretion to initially list companies that did not meet all of its quantitative

requirements.7

 6

 Market value of publicly held shares, also referred to as the market value of public float,

generally refers to the value of shares listed and posted for trading that are not held

directly or indirectly by a company insider.

7

 Nasdaq also retained discretion to initially list companies that did not meet its quantitative

requirements. According to Nasdaq, as of October 25, 2001, the market had not listed a

company pursuant to a waiver of a quantitative listing standard since May 20, 1999.

Results in Brief
Page 3 GAO-02-18 Amex Listing Program

As of September 7, 2001, Amex had not agreed to implement OCIE’s

recommendations related to the exchange’s use of its discretion in making

listing decisions. After identifying a dramatic increase in listings—from 9

percent to 22 percent—that did not comply with Amex’s initial guidelines

over the two periods examined, OCIE concluded that the investing public

was not receiving sufficient information about the eligibility of companies

to trade on Amex. Accordingly, OCIE recommended that Amex provide

more certainty to the investing public by converting its discretionary

guidelines into mandatory standards. Additionally, in response to concerns

that Amex was deferring the delisting of companies for what OCIE termed

“excessive” time periods and did not have requirements for determining

when to begin delistings, OCIE recommended that Amex set firm time

limits within which noncomplying companies would have to meet its

continued listing guidelines. Pending action on these recommendations,

OCIE further recommended that Amex publicly disclose the identity of

those companies that did not meet its initial or continued guidelines—for

example, by attaching a modifier to the trading symbol. Amex responded

to OCIE that it did not want to relinquish its discretionary authority or

modify its stock symbols. The exchange stressed the importance of

evaluating companies for listing on an individual basis, the adequacy of its

existing public disclosure, and the significance of the actions it has already

taken to improve its program. Nonetheless, until OCIE’s recommendations

are addressed, the public could be misled into believing that all Amex

listings meet the exchange’s guidelines. Reflecting the seriousness of their

concerns, OCIE officials told us that in the absence of an Amex agreement

to adequately address the recommendations, they would include them

among the open8

 significant9 recommendations to be reported annually to

the SEC Commissioners as a result of a 1998 GAO recommendation.10 The

Commission has the authority to require Amex to implement OCIE’s

recommendations.

 8

 Open recommendations, as defined by OCIE, are those recommendations that an SRO has

expressly declined to adopt or has failed to adequately address in its response to an

inspection report.

9

 OCIE determines that recommendations are significant based on such factors as whether

areas of fundamental importance to the SRO’s regulatory programs are involved and on the

potential impact on investors and the marketplace.

10 See Securities Regulation: Oversight of SRO’s Listing Procedures Could Be Improved

(GAO/GGD-98-45, Feb. 6, 1998).
Page 4 GAO-02-18 Amex Listing Program

Amex officials told us that the exchange was fulfilling its SRO

responsibilities related to its equity listing operations in part by

individually monitoring the status of companies that did not meet its

continued listing guidelines and summarizing related information in

monthly reports to management. However, the listing department did not

prepare management reports that aggregated and analyzed overall

statistics to measure listing program results, such as the percentage of

companies granted or denied exceptions to the initial and continued listing

guidelines, or the percentage of companies granted exceptions that

returned to compliance or were delisted. As a result, Amex and OCIE have

lacked information that could be used to demonstrate the effectiveness of

Amex’s exceptions-granting policies and its initial and continued listing

guidelines. Responding to an earlier GAO recommendation, OCIE has

required two other markets to develop periodic management reports on

their listing programs’ operating results. According to an OCIE official,

these reports are useful in monitoring the listing activities of the related

markets.

This report contains recommendations that the Chairman of SEC, as part

of SEC’s ongoing efforts to ensure that Amex addresses weaknesses in the

management of its equity listing program, (1) direct Amex to implement

mandatory quantitative listing requirements or provide ongoing public

disclosure of noncompliant companies, and (2) require Amex to report

quarterly to its Board of Governors on the operating results of its equity

listing program and make these reports available to OCIE for review. Such

reports should contain sufficient information to demonstrate the overall

effectiveness of the Amex equity listing program, including, at a minimum,

that of its exceptions-granting policies and its initial and continued listing

guidelines.

We requested comments on a draft of this report from Amex and SEC. The

comments are described in detail later in this report, and the written

comments appear in appendixes I and II, respectively. Amex committed to

taking action to address our recommendation for improving public

disclosure of its listing requirements by replacing its discretionary

guidelines with mandatory initial and continued listing standards. Also, in

response to our recommendation, Amex committed to enhancing its

management reports. While we support Amex’s proposed changes to its

management reports, we believe that these reports could be further

enhanced by adding data on the effectiveness of Amex’s practices for

continued listings. SEC officials said that they were pleased that Amex

would be addressing our recommendations and added that they would
Page 5 GAO-02-18 Amex Listing Program

continue working with the exchange to ensure that its proposed changes

are implemented effectively.

As of June 30, 2001, Amex was the third-largest U.S. market in terms of the

number of companies whose common stock it listed.11 With the common

stock of 704 companies listed, Amex trailed only Nasdaq, which had 4,378

listings,12 and NYSE, which had 2,814 listings. Overall, about 98 percent of

the common stocks listed on U.S. markets were listed on Amex, Nasdaq,

or NYSE. The remaining markets had significantly fewer listings. For

example, the fourth-largest market in terms of the number of companies

listed was the Boston Stock Exchange, with 84 listings, 46 of which were

also listed on Nasdaq.13

In 1998, the National Association of Securities Dealers (NASD), which also

owns and operates Nasdaq, purchased Amex. Although Amex retained its

independence as an exchange, in July 1999 its equity listing program was

moved from New York City to Gaithersburg, Maryland, and integrated with

the Nasdaq listing program. In June 2000, NASD completed the first phase

of its plan to restructure Nasdaq as a stand-alone stock-based

organization. According to Amex officials, as a result of this restructuring,

the Amex equity listing department began moving back to New York in

November 2000, and the move was completed about 6 months later.

Under federal law and consistent with its responsibilities as an SRO, each

U.S. market establishes and implements the rules that govern equity

listings in its market with the intent of maintaining the quality of the

markets and public confidence in them. In general, a company applies to

have its stock listed for trading in a specific market, subject to that

market’s rules. This process includes submitting an application for review,

together with supporting information such as financial statements, a

prospectus, a proxy statement, and relevant share distribution

 11 Common stocks are securities that represent an ownership interest in a corporation. If

the company has issued preferred stock, common stockholders assume the greater risk but

generally exercise greater control and may receive greater returns in the form of dividends

and capital appreciation.

12 Nasdaq is a two-tier market made up of the Nasdaq National Market, which as of June 30,

2001, listed 3,567 larger companies, and the Nasdaq SmallCap Market, which as of the same

date listed 811 smaller companies.

13 The U.S. markets are not limited to trading in the stocks that they list. Under SEC

regulations and market rules, stocks may be traded under unlisted trading privileges in

markets other than those in which they are listed.

Background
Page 6 GAO-02-18 Amex Listing Program

information. As part of making an initial listing decision, the market’s

equity listing department reviews these submissions for compliance with

its listing requirements and conducts background checks of company

officers and other insiders. The equity listing department will also monitor

companies for compliance with the market’s continued listing

requirements and, in accordance with the market’s rules, will take action

when these requirements are not met.

SEC’s oversight of a market’s equity listing requirements includes

reviewing the SRO’s proposed rules to ensure that they are consistent with

the requirements of the Securities and Exchange Act of 1934. These rules,

which make up the market’s initial and continued equity listing guidelines

or standards, must be approved by SEC and can be changed only with

SEC’s approval. SEC also reviews the SRO’s listing decisions, either on

appeal or by its own initiative, and SEC’s OCIE periodically inspects the

SRO’s listing program to ensure compliance with the market’s listing

requirements.

In all U.S. markets, quantitative and qualitative listing requirements for

equities have generally addressed the same or similar factors. Two aspects

of the quantitative listing requirements are noteworthy. First, the minimum

thresholds for meeting them varied according to the characteristics of the

companies the markets sought to attract. Second, initial listing

requirements were generally higher than continued listing requirements.

Qualitative listing requirements addressed corporate governance and other

factors. The most significant difference between the equity listing

requirements of Amex and those of other U.S. stock markets was that

Amex was one of only two markets that retained the discretion to initially

list companies that did not meet all of its quantitative requirements.

Amex’s quantitative initial listing guidelines for equities have generally

addressed factors that are the same as or similar to those addressed by the

initial listing standards of the other U.S. stock markets, including factors

such as minimum share price, stockholders’ equity, income, market value

of publicly held shares, and number of shareholders. However, the

minimum thresholds for meeting the requirements of each market have

varied to reflect the differences in the characteristics—such as size—of

the companies that each market targeted for listing. For example, Amex

has marketed itself as a niche market designed to give growth companies

access to capital and to the markets. A company could qualify for initial

listing on Amex under one of two alternatives. Under both alternatives, a

Listing Requirements

Have Generally

Addressed the Same

Factors, but Amex

Has Not Required

That All Quantitative

Requirements Be Met

Quantitative Listing

Requirements Generally

Addressed the Same

Factors, Although

Minimum Thresholds

Varied
Page 7 GAO-02-18 Amex Listing Program

company was required to have a minimum share price of $3 and minimum

stockholders’ equity of $4 million (see table 1). In addition, under one

alternative, a company could qualify for listing with no pretax income, a

minimum market value of publicly held shares of $15 million, and a 2-year

operating history. Under the other alternative, a company was required to

have minimum pretax income of $750,000, either in the latest fiscal year or

in 2 of the most recent 3 fiscal years, and a minimum market value of

publicly held shares of $3 million.

Table 1: Comparison of Quantitative Initial and Continued Listing Requirements for Selected Factors in the Largest U.S. Stock

Markets (October 25, 2001)

Nasdaqa

Selected factors Amex SmallCap Market National Market NYSE

Initial Continued Initial Continued Initial Continued Initial Continued

Share price $3 NRb$4 $1 $5 $1 or $3 NR $1

Stockholders’ equity

(dollars in millions)

$4 $2 or $4 $5 $2.5 NR, $15, or

$30

NR or $10 NR $50

Income: pretax or netc

(dollars in millions)

NR or $.75d

NR $.75d$.5d$1dNR $6.5eNR

Market value of publicly

held shares (dollars in

millions)

$3 or $15 $1 $5 $1 $8, $18, or

$20

$5 or $15 $60 or

$100

$50f

Number of

shareholders

400 or 800 300 300 300 400 400 500 to

2,200

400 or

1,200

Note: This table does not include all the markets’ listing requirements, which typically involve two or

more factors and two or more listing alternatives. When multiple requirements are shown for a factor,

the actual requirement will depend on the listing alternative, which may not be fully reflected in the

table.

a

In response to the September 11, 2001, terrorist attacks on the United States, Nasdaq implemented

an across-the-board moratorium on the minimum-bid and market value of public-float requirements

for continued listing on Nasdaq, effective through January 2, 2002.

b

No requirement (NR) exists for this factor.

c

The income requirements are pretax, except for the Nasdaq SmallCap Market, where they are net.

d

The income shown is for the latest fiscal year or 2 of the 3 most recent fiscal years.

e

The income shown is a 3-year cumulative requirement in which each year must have positive

income.

f

The requirement is for total market value of all shares, rather than market value of publicly held

shares.

Sources: Individual markets’ listing guidelines or standards, as applicable.

The Nasdaq SmallCap Market focused on smaller companies that were

generally similar in size to those listed on Amex, and its listing standards

and minimum thresholds were similar to Amex’s. To be eligible for listing

on the Nasdaq SmallCap Market, a company was required to have, among
Page 8 GAO-02-18 Amex Listing Program

other things, a minimum share price of $4, a minimum market value of

publicly held shares of $5 million, a 1-year operating history, and either a

minimum net income of $750,000 in the latest fiscal year or in 2 of the most

recent 3 fiscal years, or $5 million of stockholders’ equity. Alternatively, if

the company did not meet the operating history, income, or equity

requirements, the minimum market value of all shares was required to be

$50 million.

In contrast to Amex and the Nasdaq SmallCap Market, the Nasdaq

National Market and NYSE targeted larger companies, and their listing

standards had higher minimum thresholds. For example, the Nasdaq

National Market required in part that listing companies have a minimum of

$1 million in pretax income in the latest fiscal year or in 2 of the 3 most

recent fiscal years, along with a minimum market value of publicly held

shares of $8 million, depending on the listing alternative. In comparison,

NYSE required a company to have, among other things, a minimum total

pretax income of $6.5 million for the most recent 3 years and a minimum

market value of publicly held shares of $60 million or $100 million,

depending on the listing alternative.

The quantitative continued listing requirements (the minimum thresholds

that listed companies must maintain to continue to be listed) were

generally lower than those for the initial listing requirements (see table 1).

For example, although Amex’s initial listing guidelines required, under one

alternative, that a company have at least $4 million of stockholders’ equity

and $750,000 in pretax income, a company could remain in compliance

with the continued listing guidelines even if it had losses in 3 of the last 4

years (beginning with its listing date), provided that it maintained $4

million in stockholders’ equity. Such differences between initial and

continued listing requirements were typical of all the U.S. markets.

The qualitative listing requirements for equities in all U.S. markets

addressed corporate governance requirements as well as various other

factors. Corporate governance requirements are generally concerned with

the independence of corporate management and boards of directors, as

well as with the involvement of shareholders in corporate affairs. These

requirements address such factors as conflicts of interest by corporate

insiders, the composition of the audit committee, shareholder approval of

certain corporate actions, annual meetings of shareholders, the

solicitation of proxies, and the distribution of annual reports.

Qualitative Listing

Requirements Have

Addressed Corporate

Governance and Other

Factors
Page 9 GAO-02-18 Amex Listing Program

U.S. markets may also consider various other qualitative factors when

considering a company for listing. These factors are inherently subjective

and are not subject to comparison among markets. For example, Amex’s

guidelines stated that even though a company may meet all of the

exchange’s quantitative requirements, it may not be eligible for listing if it

produces a single product or line of products, engages in a single service,

or sells products or services to a limited number of companies. In

addition, in making a listing decision, Amex would consider such

qualitative factors as the nature of a company’s business, the market for its

products, the reputation of its management, and the history or recorded

pattern of its growth, as well as the company’s financial integrity,

demonstrated earning power, and future outlook.

Although all U.S. markets had rules giving them the discretion to apply

additional or more stringent requirements in making an initial or

continued listing decision, only Amex and Nasdaq retained the discretion

to initially list companies that did not meet their quantitative

requirements.14 The Amex listing guidelines stated that the exchange’s

quantitative guidelines are considered in evaluating listing eligibility but

that other factors are also considered. As a result, Amex might approve a

listing application even if the company did not meet all the exchange’s

quantitative guidelines. Amex believed that it was important for the

exchange to retain discretion to approve securities for initial listing that

did not fully satisfy each of its quantitative requirements because it would

be impossible to include every relevant factor in the guidelines, especially

in an evolving marketplace.

As of September 7, 2001, Amex had not agreed to implement OCIE’s

recommendations related to the exchange’s use of its discretion in making

listing decisions. Amex was unwilling to relinquish its discretionary

authority or to modify its stock symbols to address OCIE’s concerns. OCIE

officials told us that if these recommendations were not addressed, OCIE

would include them among the open significant recommendations that are

to be reported annually to the SEC Commissioners.

 14 As noted earlier, Nasdaq also retained this discretion, but had not listed a company

pursuant to a waiver of a quantitative listing standard since May 20, 1999.

Amex Retained the

Discretion to List

Companies That Did Not

Meet Its Quantitative

Guidelines

Amex Did Not Agree

to OCIE’s

Recommendations on

Listing Requirements

and Public

Disclosures
Page 10 GAO-02-18 Amex Listing Program

OCIE reported in April 2001 that the Amex listing department was

generally thorough in its financial and regulatory reviews of companies

seeking to be listed on the exchange. However, OCIE also reported that

Amex was using its discretionary authority more often than was

appropriate to approve initial listings that did not meet the exchange’s

quantitative guidelines, and that it did so without providing sufficient

disclosure to the investing public. OCIE reported that the percentage of

companies Amex listed that did not meet the exchange’s initial

quantitative guidelines increased from approximately 9 percent for the 20

months between January 1, 1998, and August 31, 1999, to approximately 22

percent for the subsequent 14.5 months ending on November 13, 2000.

OCIE noted that although Amex’s listing guidelines are discretionary,

investors rightfully presume that the companies listed on Amex generally

meet its quantitative and qualitative guidelines.

In response to concerns that the investing public was not receiving

sufficient information about the eligibility of companies to trade on Amex,

OCIE recommended that Amex amend its rules to provide mandatory

initial quantitative listing requirements. Until the mandatory listing

requirements are in place, OCIE recommended that Amex provide some

form of public disclosure to identify companies that do not meet its initial

listing guidelines. For example, Amex could attach a modifier to the

trading symbols of these companies. The report indicated that another

alternative would be to issue a press release each time Amex lists a

company that does not meet its quantitative guidelines. However, OCIE

officials said that a press release was not the preferred form of public

disclosure because it was a one-time occurrence, while a symbol modifier

would accompany a listing until the company complied with Amex listing

requirements.

OCIE also expressed concerns about Amex’s use of its discretionary

authority in making continued listing decisions. The concerns it raised in

its April 2001 inspection report were similar to those raised in a 1997

report. In both reports, OCIE concluded that Amex did not identify

noncompliant companies in a timely manner and that it deferred delisting

actions for too long and without good cause. In addition to citing lapses in

Amex’s timely identification of companies that did not meet its continued

listing guidelines, OCIE reported in 2001 that for 5 of 34 companies

reviewed, or 15 percent, Amex either granted excessive delisting deferrals

or did not begin delisting proceedings in a timely manner. Also, we learned

from Amex that 71 companies—about 10 percent of the exchange’s 704

listings—did not meet all aspects of its continued listing guidelines as of

OCIE Recommendations

Addressing Amex’s Use of

Its Discretion Remained

Open
Page 11 GAO-02-18 Amex Listing Program

July 31, 2001. Of these, 12 companies had been out of compliance with its

guidelines for more than 2 years, and 20 companies had been out of

compliance for between 1 and 2 years (see table 2).

Table 2: Duration of Time That Companies Did Not Comply With Amex’s Continued

Listing Guidelines (July 31, 2001)

Duration of time Number of companies

Less than 6 months 25a

6-12 months 14b, c

1-2 years 20a,b

More than 2 years 12

Total 71

a

Includes one company that was delisted.

b

Includes one company that came into full compliance after July 31, 2001.

c

Includes one company for which an appeal of a delisting notification was in progress as of

September 6, 2001.

Source: Amex.

In addition, under a November 2000 Amex rule change, listed companies

were required to issue a press release to inform current and potential

investors when Amex notified the companies of a pending delisting

decision.15 According to Amex, the exchange had sent notices to 18

companies of potential delisting between the time of the rule change and

August 30, 2001. Amex informed us that these companies had not been in

full compliance with the continued listing guidelines for an average of

about 6.5 months before receiving the notice.

In response to the concerns OCIE expressed in 1997 about Amex deferring

delisting action without good cause, the exchange agreed to review on a

quarterly basis the status of companies that did not meet its continued

listing standards and to document its rationale for allowing noncompliant

companies to remain listed. OCIE believed that by more closely

scrutinizing the actions that companies were taking to comply with the

exchange’s continued listing guidelines, Amex would be more likely to

delist companies that were noncompliant for excessive periods. However,

OCIE found in its most recent inspection that although Amex had

performed the agreed-upon quarterly reviews, the exchange was still not

taking timely action to delist noncompliant companies.

 15 See Release No. 34-43559, File No. SR-Amex-00-43.
Page 12 GAO-02-18 Amex Listing Program

OCIE recommended in its 2001 inspection report, as it had in its 1997

report, that Amex identify in a more timely manner the companies that did

not comply with its continued listing guidelines, grant delisting deferrals to

noncompliant companies only if the companies could show that a

reasonable basis existed for assuming they would return to compliance

with the listing guidelines, document reviews of each company’s progress

in coming into compliance with the listing guidelines, and place firm time

limits on the length of delisting deferrals. The report also recommended

that Amex append a modifier to the company’s listing symbol or devise an

alternative means of disclosure to denote that a company was not in

compliance with Amex’s continued listing guidelines.16

As of September 7, 2001, OCIE and Amex were in ongoing discussions

about the actions Amex would take to address OCIE’s recommendations.

However, in responding to OCIE’s 2001 inspection report and in

subsequent discussions with OCIE officials, Amex indicated that it did not

want to relinquish its discretionary authority or to modify its stock

symbols. Amex stressed the importance of being able to evaluate a

company’s suitability for listing on a case-by-case basis. The exchange

further responded that its published listing policies put potential investors

on notice that Amex would evaluate an applicant based on a myriad of

factors and might approve companies for listing that did not meet all of its

quantitative guidelines. In addition, Amex cited the November 2000 rule

change under which companies are required to issue a press release to

inform investors of a pending delisting decision. Amex officials also told

us that investors could obtain sufficient information about a company’s

operating condition from other public sources, obviating the need for a

stock symbol modifier or other public notice.

OCIE officials said that they believed additional disclosure to the investing

public would be necessary until Amex turned its equity guidelines into

firm standards. The officials remained concerned that individual investors

were unaware that Amex’s listing guidelines provided broad discretion in

making listing decisions. They emphasized that they were concerned

about Amex’s discretion to list companies that did not meet its

quantitative guidelines, stressing that they did not want to remove Amex’s

discretion to apply additional or more stringent requirements in making

 16 Although the OCIE report specifically recommended that Amex “consider” appending a

symbol, OCIE officials told us that Amex was expected to act on the recommendation.

Amex Did Not Agree to

Relinquish Its

Discretionary Authority or

to Modify Its Stock

Symbols
Page 13 GAO-02-18 Amex Listing Program

listing decisions. Further, although the OCIE report acknowledged that

alternative disclosure mechanisms existed, OCIE officials said that

attaching a modifier to a stock’s listing symbol to indicate that a stock did

not meet either the initial or continued listing standards would provide the

broadest and therefore most preferred type of disclosure. For example, a

company’s press release making public a delisting decision would not be a

preferred form of disclosure because, depending on the circumstances, a

company could remain out of compliance with Amex’s continued listing

requirements for months or years without being subject to a delisting

decision. To address this concern, NYSE requires a company to issue a

press release when the exchange notifies the company that it does not

meet the continued listing requirements. Nonetheless, a press release is a

one-time notice and, as such, may limit potential investors’ awareness of a

company’s listing status.

Amex also expressed concern that OCIE was imposing strict requirements

on its market that would not be applicable to other markets. Amex

specifically noted that neither the Nasdaq National Market nor NYSE

appended a symbol to listed securities that did not meet their continued

listing requirements. Amex officials told us that requiring Amex to do so

could mislead investors into believing that other markets do not follow

listing practices similar to those of Amex. Amex also said that a modifier

would place an unwarranted negative label on the company and send an

inappropriate message to the market. As noted above, companies listed on

Amex have more closely resembled those listed on the Nasdaq SmallCap

Market than those listed on the Nasdaq National Market. According to a

Nasdaq official, the Nasdaq SmallCap Market has used a modified listing

symbol for all companies that fall below its continued listing requirements

since the market began operating in 1982,17 and 10 stocks had modified

symbols as of August 15, 2001. Nonetheless, OCIE officials said that they

are in the process of inspecting the listing programs at Nasdaq and NYSE

and would, if they determined that companies were listed that did not

meet the markets’ equity listing standards, recommend that stock symbol

modifiers be used to identify such companies.

 17 According to Nasdaq, when the National Market and SmallCap Market were formed in

1982, Nasdaq’s existing practice of using symbol modifiers was discontinued for the

National Market because Amex and NYSE did not have such a requirement.
Page 14 GAO-02-18 Amex Listing Program

Finally, Amex said that a November 2000 rule change,18 as well as

significant staffing changes that include a new department head, were

having the effect of reducing the number of stocks approved for listing

that did not meet the exchange’s quantitative guidelines. According to

Amex, from November 1, 2000, through August 27, 2001, 6 of the 39 new

listings—approximately 15 percent—were granted exemptions to the

exchange’s quantitative listing guidelines. Five companies were approved

for listing based on an appeal to the Committee on Securities, and one

company was approved by the listing department staff because it had

“substantially” met all of the exchange’s initial listing guidelines.

According to Amex, the determination of substantial compliance was

based on the fact that the applicant had met all the exchange’s guidelines,

except that the company’s price at the time of approval was $2.9375,

instead of the $3.00 minimum required by the guidelines. As discussed

earlier, OCIE had found that 22 percent of new listings for a prior period

had been granted exemptions. Amex officials said that they expected the

downward trend to continue in the number of stocks approved for listing

that did not meet the exchange’s quantitative guidelines. OCIE officials

told us that they had considered the changes to the Amex listing program

in making their recommendations.

In a 1998 report, we recommended that the SEC Chairman require OCIE to

report periodically on the status of all open, significant recommendations

to the SEC Commissioners. Our rationale was that involving the

Commissioners in following up on recommendations would provide them

with information on the status of corrective actions that OCIE had deemed

significant. Also, because the Commissioners have the authority to require

the SROs to implement the staff’s recommendations, reporting to them

would provide the SROs with an additional incentive to implement these

recommendations. After preparing its first annual report in August 1998,

including both significant recommendations on which action had been

agreed to but not completed and recommendations that had been rejected,

OCIE determined that future reports would include only the status of

 18 Before the rule change, Amex listing staff could forward an application that did not meet

the quantitative listing guidelines to Amex’s Committee on Securities with a

recommendation for approval. Under the rule change, an applicant that is not approved for

listing is responsible for appealing the determination to the Committee, thereby elevating

authority for granting the exception. However, listing staff are still authorized to approve a

company for listing if they determine that a company is in “substantial” compliance with

Amex’s listing requirements. (See Release No. 34-43308, File No. SR-Amex-00-12.)

OCIE Planned to Report to

the SEC Commissioners on

Significant

Recommendations That

Amex Did Not Agree to

Implement
Page 15 GAO-02-18 Amex Listing Program

significant recommendations that an SRO had expressly declined to adopt

or had failed to adequately address. Reflecting the seriousness of their

concerns about the open recommendations related to Amex’s use of its

discretionary authority in making initial and continued listing decisions,

OCIE officials told us that in the absence of an Amex agreement to

adequately address these recommendations, OCIE would include them

among the open significant recommendations to be reported annually to

the SEC Commissioners.

Amex officials told us that the exchange was fulfilling its SRO

responsibilities related to its equity listing operations in part by

individually monitoring the status of companies that did not meet its

continued listing guidelines and, beginning in January 2001, by

summarizing related information in monthly reports to management.

These monthly reports provided information on the output of the

department’s activities, including the names and total number of

companies that did not meet the continued listing guidelines, the reasons

that individual companies did not meet the guidelines, the date of the

latest conference with each company to discuss its listing status, the total

number of such conferences held, and the total number of decisions made

on the basis of these conferences.

The Amex listing department did not, however, prepare management

reports that aggregated and analyzed overall statistics to measure program

results over time. As a result, Amex could not demonstrate the

effectiveness of its exceptions-granting policies or its initial and continued

listing guidelines. For example, Amex did not routinely aggregate or

analyze statistics on the percentage of applicants listed that were granted

exceptions to initial or continued listing guidelines, or on the length of

time that companies were not in compliance with the continued listing

guidelines and their progress in coming back into compliance with them.

Collecting and analyzing such data over time, especially in conjunction

with the outcomes for these companies—whether they achieved

compliance or were delisted—could provide Amex and OCIE with an

indicator of the effectiveness of Amex’s process for granting exceptions.

Analysis of this information could also help Amex and OCIE determine

whether a significant difference exists between the outcomes for

companies that meet the listing guidelines and those that do not. Also,

although Amex told OCIE that it continually “monitors” to determine

whether its guidelines need to be revised, Amex did not develop and

aggregate statistics on the number of companies delisted or on the reasons

for delistings, such as noncompliance with listing requirements or a move

Amex Did Not

Prepare Management

Reports That

Demonstrated the

Effectiveness of Its

Listing Program
Page 16 GAO-02-18 Amex Listing Program

to another market. As indicated above, Amex provided us with some of

this information in response to a specific request but also told us that the

listing department did not routinely aggregate such information for

management purposes. Collected and analyzed over time, this information

could provide Amex and OCIE with an indicator of the effectiveness of

Amex’s initial and continued listing guidelines and, therefore, could be

useful in identifying appropriate revisions to them.

Other markets have developed this kind of management report. In

response to concerns about the effectiveness of Nasdaq’s listing

department, we recommended in 1998 that SEC require NASD to develop

management reports based on overall program statistics. The resulting

quarterly reports to senior Nasdaq management and OCIE include data on

the number and disposition of listing applications, number and reasons for

noncompliance with continued listing standards, disposition of companies

that do not comply with the continued listing standards, requests for and

results of hearings, status of companies granted temporary exceptions to

the continued listing standards as a result of hearings, and number of and

reasons for delistings. As a result of a 1998 OCIE recommendation, NYSE

submits reports containing similar information to the NYSE Board of

Directors and, upon request, to OCIE. According to an OCIE official, the

resulting quarterly reports are useful for monitoring the listing activities of

these markets.

Amex’s use of its discretion to initially list and continue to list companies

that do not meet the exchange’s quantitative guidelines for equities could

mislead investors, who are likely to assume that the companies listed on

Amex meet the exchange’s listing guidelines. Because investors are

entitled to clear information for use in making investment decisions, they

should be informed when listed companies do not meet these guidelines.

Amex has reiterated its concern about the potentially negative impact of

being the only market to publicly identify listings that do not meet its

guidelines. The Nasdaq SmallCap Market already uses stock symbol

modifiers for companies that do not meet its continued listing standards.

Also, OCIE officials told us they would recommend that other markets

disclose noncompliance with their continued listing standards. (OCIE did

not identify noncompliance with initial listing standards as an issue.)

Ultimately, Amex could avoid concerns about the negative impact of

public disclosure by adopting firm quantitative guidelines. In the

meantime, including the recommendations that Amex rejected in the OCIE

annual reports to the SEC Commissioners—who have the authority to

Conclusions
Page 17 GAO-02-18 Amex Listing Program

require their implementation—would provide an additional incentive for

Amex to act.

Notwithstanding Amex’s expectation that changes to its listing program

would result in diminished use of its discretion, the ongoing concerns

about weaknesses in program operations and the potentially negative

impact of exchange practices on public confidence warrant continued

monitoring of Amex’s listing program. Both Amex and OCIE could use

routine management reports that reflect the performance of the exchange

listing program to improve oversight of the program. Amex officials did

not use aggregated and analyzed information on the results of the listing

process to help judge its overall effectiveness, including that of its

exceptions-granting policies or its initial and continued listing guidelines.

Such information would include, among other things, the number and

percentages of companies listed that have exceptions to the initial and

continued listing guidelines, the number and percentages of companies in

each group that are delisted, the reasons for the delistings, and the

turnover rate for listings. Aggregating and analyzing such information

could help Amex and OCIE to identify and address weaknesses in Amex’s

listing program operations.

As part of SEC’s ongoing efforts to ensure that Amex addresses

weaknesses in the management of its equity listing program, we

recommend that the Chairman, SEC,

• direct Amex to implement mandatory quantitative equity listing

requirements or provide ongoing public disclosure of noncompliant

companies, and

• require Amex to report quarterly to its Board of Governors on the

operating results of its equity listing program and make these reports

available to OCIE for review. Such reports should contain sufficient

information to demonstrate the overall effectiveness of the Amex equity

listing program, including, at a minimum, that of its exceptions-granting

policies and its initial and continued listing guidelines.

We obtained written comments on a draft of this report from Amex and

SEC officials. The written comments are presented in appendixes I and II,

respectively. Amex committed to taking action to address our

recommendation for improving public disclosure of its listing

requirements by replacing its discretionary guidelines with mandatory

initial and continued listing standards (see appendix I, exhibits A and B).

Recommendations to

the Chairman, SEC

Agency Comments

and Our Evaluation
Page 18 GAO-02-18 Amex Listing Program

Also in response to our recommendation, Amex committed to enhancing

its management reports as they relate to its initial listing program. SEC

officials commented that they were pleased that Amex would be making

changes to its listing program that would address the findings and

recommendations outlined in our report, and they said they would

continue working with Amex to ensure that the proposed changes are

implemented effectively.

Amex noted in its comment letter that its proposals are broad and that the

various details would be finalized as part of the rule approval process,

which involves SEC. In earlier discussions with Amex about its draft

proposals, we expressed the view that Amex’s rules would provide for

greater investor protection if they included specific time frames for

notifying the public about material events related to a company’s listing

status. For example, such time frames would provide for expeditiously

notifying the public after Amex advises a company that delisting

proceedings are to be initiated. We also observed that Amex had not

established other critical time frames for procedures such as advising a

company that it does not meet the exchange’s continued listing

requirements. Amex indicated in its comment letter that it intends to

include applicable time frames as it works out the details of its proposals.

SEC officials told us that they would work with Amex to ensure that

appropriate time frames are established.

In agreeing to enhance its management reports to address our

recommendation, Amex acknowledged the potential value of these reports

in light of proposed changes to its initial listing requirements. Under these

proposed changes, companies could qualify for initial listing under Amex’s

“regular” listing standards or, subject to mitigating circumstances, under

its less stringent “alternative” standards. Amex committed to enhancing its

management reports with information on companies that have been

approved under the proposed alternative standards to provide for

executive management review of the continued status of such companies,

as compared with those approved for listing pursuant to its regular listing

standards. Amex believes that its enhanced management reports should be

useful in providing feedback on the application of the alternative

standards to the Amex Board of Governors, Amex Committee on

Securities, and SEC. SEC officials told us that they would use the

enhanced reports to monitor implementation of the alternative standards.

Although we support the changes proposed by Amex, we believe that the

management reports would be of even greater use to Amex and SEC in

their oversight if they included data on the effectiveness of Amex’s

practices for continued listings in addition to data on the exchange’s
Page 19 GAO-02-18 Amex Listing Program

exceptions-granting practices for initial listings. Our report discussed the

kinds of aggregated and analyzed data that would be important to include

in Amex’s management reports and that Nasdaq and NYSE include in their

reports. Amex would benefit by working with SEC to ensure that the

exchange’s reports contain similar information.

To describe the key differences between the Amex initial and continued

equity listing guidelines and the equity listing standards of other U.S. stock

markets, we compared the quantitative and qualitative guidelines and

standards of the seven U.S. markets that are registered to trade stock and

that have listing requirements. These markets include six national

securities exchanges—Amex, the Boston Stock Exchange, the Chicago

Stock Exchange, NYSE, the Pacific Exchange, and the Philadelphia Stock

Exchange—and one national securities association, the Nasdaq Stock

Market. The seventh national securities exchange, the Cincinnati Stock

Exchange, trades only stocks that are listed on other exchanges and does

not have listing standards. We also interviewed officials from SEC’s OCIE

and from Amex, Nasdaq, and NYSE to gain a further understanding of the

initial and continued listing requirements of each market. This report

places greater emphasis on the results of our comparison of Amex

guidelines with the standards of Nasdaq and NYSE, because about 98

percent of U.S. common stocks were subject to the listing requirements of

one of these three markets at the time of our review.

In reviewing OCIE recommendations to Amex for improving its equity

listing program, we discussed the contents of the April 2001 inspection

report and Amex’s written response to it with officials of OCIE and Amex’s

Listings Qualifications Department and Office of General Counsel,

focusing on the areas of disagreement between OCIE and Amex.

Additionally, we examined OCIE’s 1997 inspection report on Amex’s

listing activities, Amex’s response, and associated correspondence to

determine the nature of weaknesses identified in the OCIE inspection and

how they were resolved. We also reviewed related GAO reports.

To examine how Amex monitors the effectiveness of its equity listing

department operations, we interviewed Amex and OCIE officials. We also

reviewed related GAO reports and examined the Nasdaq and NYSE

quarterly management reports that are provided to OCIE.

We conducted our work in Chicago, IL; New York, NY; and Washington,

D.C., from November 2000 through October 2001, in accordance with

generally accepted government auditing standards.

Scope and

Methodology
Page 20 GAO-02-18 Amex Listing Program

As agreed with you, unless you publicly release its contents earlier, we

plan no further distribution of this letter until 30 days from its issuance

date. At that time, we will send copies to the Chairmen and Ranking

Minority Members of the Senate Committee on Banking, Housing, and

Urban Affairs and the House Committee on Financial Services; the

Chairman of the House Energy and Commerce Committee; and other

interested congressional committees and organizations. We will also send

copies to the Chairman of SEC and to the Chairman and Chief Executive

Officer of Amex. Copies will also be made available to others upon

request.

If you or your staff have any questions regarding this report, please

contact me at (202) 512-8678, hillmanr@gao.gov, or contact Cecile Trop,

Assistant Director, at (312) 220-7705, tropc@gao.gov. Key contributors

include Neal Gottlieb, Roger Kolar, Anita Zagraniczny, and Emily

Chalmers.

Sincerely yours,

Richard J. Hillman

Director, Financial

Markets and Community Investment
Appendix I: Comments From the American

Stock Exchange

Page 21 GAO-02-18 Amex Listing Program

Appendix I: Comments From the American

Stock Exchange
Appendix I: Comments From the American

Stock Exchange

Page 22 GAO-02-18 Amex Listing Program
Appendix I: Comments From the American

Stock Exchange

Page 23 GAO-02-18 Amex Listing Program
Appendix I: Comments From the American

Stock Exchange

Page 24 GAO-02-18 Amex Listing Program
Appendix I: Comments From the American

Stock Exchange

Page 25 GAO-02-18 Amex Listing Program
Appendix I: Comments From the American

Stock Exchange

Page 26 GAO-02-18 Amex Listing Program
Appendix I: Comments From the American

Stock Exchange

Page 27 GAO-02-18 Amex Listing Program
Appendix II: Comments From the Securities

and Exchange Commission

Page 28 GAO-02-18 Amex Listing Program

Appendix II: Comments From the Securities

and Exchange Commission

250010
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